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GAAP and IFRS Convergence Uncovered - Big 4 Exploration Series

“The FASB believes that seeking more comparable global
accounting standards ­– improving the quality of accounting standards used
around the world while reducing differences among those standards – is
consistent with its core mission.” – Financial
Accounting Standards Board (FASB)

IFRS governs virtually all of the developed world (and quite
frankly a majority of the undeveloped). Seemingly only in the United States
does its momentum appear to have found resistance, whether due to the pure
volume of U.S. based companies or some other contributing factor.

Navigate any “Big 4” accounting platform and you’ll find a
separate section of review for both U.S. Generally Accepted Accounting
Principles (GAAP) and IFRS. PwC
releases a monthly statement dedicated entirely to IFRS content. Yet, a
decade and a half after the passage of the Norwalk Agreement, signed in 2002 by
the Financial Accounting Standards Board (FASB) and the International
Accounting Standards Board (IASB) to merge standards, the agreement’s most
ardent supporters acknowledge the convergence’s stalled inertia.

So what exactly happened? Are cost-sensitive companies
reluctant to change? Are budget constrained regulatory agencies unable to draft
legislation that would give the process new wheels? Ironically, on the
precipice of revenue recognition adoption, a standard at the heart of GAAP and
IFRS convergence, we commence our search for answers.

“At their joint meeting in Norwalk, Connecticut, USA on
September 18, 2002, the FASB and the IASB each acknowledged their commitment to
the development of high-quality, compatible accounting standards that could be
used for both domestic and cross-border financial reporting.”

In the short-term (pre-2005), reduce “individual
differences” between U.S. GAAP and IFRS for standards that would require less
time to complete.

Remove all other differences beginning on
January 1, 2005 through the “coordination of future work programs.”

Continue progress on joint projects that are
already in the works.

“Encourage their respective interpretative
bodies to coordinate their activities”

The non-committal form of the principles, drafted on a
two-page memorandum, left both parties with a way out at signs of resistance,
symbolic of things to come.

Practical
Challenges

On July 13, 2012, the Securities and Exchange Commission
(SEC) issued a Final Staff Report on the work plan for incorporating IFRS into
the financial reporting system for U.S. public business entities.

The majority of jurisdictions that adopt IFRS
use measures to “ensure suitability of those standards.” In a sense, because
there isn’t a standardized approach for incorporating international standards,
the “potential rejection of a proposed standard” can serve as influence over
the IASB in decisions regarding scope, method, and timing of implementation of
the new standard.

Public business entities in the United States
expressed a “burden of conversion,” with potential time and monetary
restrictions playing substantial roles.

Private contracts reliance on reference to U.S.
GAAP principles and U.S. GAAP in name. A convergence to IFRS would require
rewording and potentially rewriting an untold number of private contracts by
U.S. companies.

The IASB’s online platform has no reference to events after
the April 2012 joint progress report.

Conclusion

The speculative environment that has shadowed the IFRS and
GAAP convergence from almost day one will continue to follow it, potentially
long after any official guidance has been released. There has been suggestion
that the “professional
liability” atmosphere of the United States, where practitioners and others
are held to a higher standard in a litigious setting, requires the more
industry specific, rules-based guidance of U.S. GAAP. Several other reasons
exist in a hypothetical world. The reality of the current landscape perpetuates
the notion that a convergence in the near-future is unlikely. There are
differences in new standards such as the leasing standard (ASC 842 or IFRS 16)
and the financial instrument standard (ASC 825 or IFRS 9) that are not even
effective yet, shedding light on the skepticism of complete convergence
anywhere in the near future

At Bloomberg BNA we will continue to monitor any IFRS and
GAAP convergence sightings, but like bipartisan governance in the U.S., such
viewings are increasingly rare.

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